Current CEO seen retiring next year, S&P leader leads pack of possible replacements

NEW YORK (MarketWatch) — McGraw-Hill Cos. Chief Executive Harold “Terry” McGraw is quietly planning his retirement and Doug Peterson, president of the company’s Standard & Poor’s Ratings Services, is the top contender for the job, according to sources familiar with the matter.

McGraw-Hill is planning for a change in senior management in the next 12-18 months. McGraw will soon turn 65, which is historically the retirement age at the company. The CEO is likely to step down by the annual meeting in 2014, the sources said.

Whoever succeeds McGraw will be faced with defending the company in a $5 billion federal lawsuit over its ratings of securities that helped create the 2008 financial crisis.

Ratings firms came under fire during the financial crisis for assigning investment grade credit ratings to securities later found to be laden with risk, including bundled mortgage instruments packed with subprime borrowers.

Peterson is the front-runner out of 3 or 4 candidates being considered, the sources told MarketWatch. McGraw-Hill
US:MHP
has typically promoted insiders to lead the firm and Peterson runs the biggest chunk of the business at McGraw-Hill.

“The ratings business will come under increasing scrutiny,” said Edward J. Atorino, Co-Director of Equity Research at The Benchmark Co. “It makes sense to have the head of the ratings firm in charge.”

“We don’t comment on speculation,” said Jason Feuchtwanger, spokesman for McGraw-Hill. “Our succession plan is the responsibility of the board of directors.” McGraw-Hill shares were up more than 3.5% in afternoon trading.

The government’s lawsuit, which targets McGraw-Hill and its ratings subsidiary Standard & Poor’s, accuses the company of misleading investors over ratings for securities in the period leading up to the financial crisis.

Attorney General Eric Holder has accused McGraw-Hill of “egregious” misconduct and said the firm concealed facts and manipulated its ratings criteria to gain business. Investors have brought numerous lawsuits against ratings firms charging them with fraud. Mortgage-related securities were at the heart of the crisis and were given a seal of approval by ratings firms.

McGraw-Hill has vigorously denied the allegations and said it plans to fight the government in court. Most recently S&P has requested to consolidate 17 lawsuits filed in state courts into a single case in federal court, arguing it is ruled by U.S. securities laws, according to report in The Wall Street Journal. The case will likely go to trial in the next 2-3 years, according to Wall Street analysts.

Ratings agencies are widely seen as having played an important role in the subprime crisis. The mortgage-backed securities that were highly-rated by ratings firms are said to have helped inflate the housing bubble in the U.S. Many say the crisis could not have happened without the ratings agencies.

McGraw Hill has said it is confident it will win the case, saying its people acted in good faith and citing a successful track record in dealing with similar cases. McGraw-Hill has said it relied on the same data used by the government and other ratings firms, who also failed to predict the housing bust.

Another contender for the top spot is Jack Callahan, chief financial officer at McGraw-Hill, who has held his position since 2010. Lou Eccleston, president of Capital IQ and Glenn Goldberg, president of the commodities and commercial markets, which includes the Platts business, are also being considered, say observers. There hasn't been a senior management transition in several years.

“It’s likely to be a smooth transition,” said Peter Appert, managing director & senior research analyst at Piper Jaffray & Co. “The firm is positioned very well for growth and profitability.”

McGraw-Hill completed the sale of it education business to Apollo Global Management LLC.
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this month, taking the firm toward an informational finance franchise.

Analysts say the direction of the firm is unlikely to change when McGraw retires and new leadership takes over.

“Some $30 trillion in corporate debt needs to be refinanced globally between 2012 and 2016,” McGraw said during the interview. “And with local debt markets emerging around the world to meet countries’ growth and development needs, S&P will continue to play an important role.”

Doug Peterson was brought in to run the ratings unit in 2010, his hire brought a fresh perspective after the scars of the financial crisis on the ratings firm, said analysts.

Peterson is an experienced financial executive, having spent 25 years at Citigroup Inc.
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part of that time running the firm’s Japanese franchise. One of the main reasons he was brought into S&P was his expertise in government relations, analysts said.

When McGraw retires, it will first time since 1998 that a McGraw won’t be leading the firm. It isn’t know whether Terry McGraw will stay on the board of directors.

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